Investing for Beginners: 3 Must-Know Tips to Avoid Silly Mistakes

It's smart to start investing, but there's no reason for you to make costly mistakes.

Investing is one of the most important things you'll ever do with your money, but for beginners it can be an intimidating process. Still, the basics of investing for beginners aren't as complicated as you might think. By following a few simple tips designed to make investing beginners feel more comfortable with their entry into the world of investments, you can get a leg up on your peers and create a strong foundation for the rest of your investing career.

Source: 401(k) 2013.

1. Find the right partnerOne of the biggest decisions that you'll make as an investor is which brokerage company you'll use. Your choice has huge implications for how much you'll pay in fees, what types of investments you'll have access to, and what your eventual returns will be. Yet few brokers make investing for beginners easier to understand. Instead, many full-service brokers want to take advantage of beginning investors, making the investing process more opaque and costing you a lot more money in the long run.

The better long-term answer is to pick a discount broker that won't charge you a huge amount in fees. Even brokers that charge relatively low commissions have a variety of resources designed to make investing for beginners easier. In particular, look for brokers that have arrangements to offer mutual funds or exchange-traded funds at no commission, as these investments can be the best way to get started investing. For more information on various discount brokers, be sure to check out our broker comparison tool.

2. In choosing investments, start with the basicsMost beginning investors believe that to make real money in the market, you have to pick individual stocks. But that's not actually true. Millions of investors have made their fortunes using mutual funds and exchange-traded funds, and those vehicles are a great way to make investing for beginners easier to grasp at first.

In particular, mutual funds and ETFs give you automatic diversification even when you have very little money to invest. Every dollar you invest gets split across dozens or even hundreds of stocks, immunizing your portfolio against catastrophic events that hit a given individual stock. Index mutual funds and ETFs like the SPDR S&P 500 (NYSEMKT:SPY)tell you exactly which stocks you own in exactly which proportions, giving you predictable exposure to the stocks of your choice. Target-date mutual funds go even further down the simplicity path, automatically adjusting your risk level as you get closer to an end goal like retirement. By acquainting you with how the markets work and how long-term returns get generated, ETFs and mutual funds make a great entry point for beginning investors.

3. Stick with safer stocksEven though avoiding individual stocks can be a smart move for novices, there's an alternative way of investing for beginners. If you focus on stocks that tend to be less volatile than the overall market, you can get specialized exposure to stocks that have promising long-term prospects, rather than simply accepting the return of a broader index.

For example, consumer staples stocks are generally perceived as being safer than the overall market, because even in tough economic times, people still need products like food, clothing, and medical supplies. The flip side is that you generally won't see gains that are as big during a bull market as you would get from investing in more aggressive stocks. Nevertheless, at least while you're getting your feet wet, following the lower-risk strategy can be a smart method of investing for beginners to follow, and it can avoid the common mistake of losing everything on an ill-advised bet.

Start investing!When you're a beginner, thinking about investing can be intimidating. But investing for beginners doesn't have to be a daunting experience. With these simple guidelines, you can avoid the mistakes that many beginning investors make and put yourself in the best position for a lifetime of great investment results.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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